Lecture 3 - Property, Plant & Equipment (Continued)

Question 1

PPE?

Answer 1

tangible items used in the production/supply of goods/services

expected to be used for more than one accounting period

Question 2

what causes depreciation?

Answer 2

the usage of an asset over time

Question 3

when does depreciation begin and end?

Answer 3

• begins when the asset is available for usage
• ends when the asset is either derecognised or classified as held for resale

Question 4

cost model?

Answer 4

PPE is valued at cost less accumulated depreciation less impairment loss

Question 5

revaluation model?

Answer 5

PPE is valued at fair value less accumulated depreciation less impairment loss

Question 6

components of PPE?

Answer 6

significant parts of the PPE

Question 7

how are ‘items’ of PPE determined?

Answer 7

judgement whether or not items belong in the same group

can be based on similar function, useful life etc

Question 8

what constitutes the cost of PPE?

Answer 8

purchase price + cost of making it fit for use + cost of removal

Question 9

what does ‘cost of making it fit for purpose’ constitute?

Answer 9

installation cost
transportation of the PPE cost
testing cost

Question 10

what does cost of removal constitute?

Answer 10

cost of dismantling, removing or disposing the asset

Question 11

what constitutes faithful representation?

Answer 11

• complete
• neutral
• free from error

Question 12

when does depreciation cease?

Answer 12

when classified as held for resale or derecognised

Question 13

how is impairment loss calculated?

Answer 13

carrying amount - recoverable amount

Question 14

recoverable amount = ?

Answer 14

higher of:
- fair value - cost of disposal
- VIU (PV of future cash flows)

Question 15

goodwill?

Answer 15

intangible asset arising from when a company is purchased for a premium

Question 16

internal goodwill?

Answer 16

value build up within a company through its own operations (e.g., brand reputation, know-how/expertise)

Question 17

criteria for recognising PPE?

Answer 17

• future economic benefit
• can be reliably measured
• asset is controlled by the entity

Question 18

when is the cost/revaluation model introduced?

Answer 18

after initial recognition

from the second financial year onwards

initial recognition is cost

Question 19

journal entry when carrying amount of asset increases?

Answer 19

debit asset, credit revaluation surplus

Question 20

revaluation surplus?

Answer 20

an equity account

stores revaluation increases in the carrying amount of PPE after it’s been revalued to reflect its fair value

Question 21

if the asset was impaired before and an impairment loss was recognised in the P&L, what do I do with the carrying amount?

Answer 21

carrying amount increases by the same extent necessary for reversal

Question 22

when carrying amount decreases, what is the journal entry?

Answer 22

debit the P&L for the expense

Question 23

if the asset was revalued to revaluation surplus, how is a decrease in carrying amount treated?

Answer 23

decrease in carrying amount is debited to the equity account to the extent necessary for reversal of the revaluation surplus

Question 24

PPE is derecognised when…

Answer 24

either it is:
- disposed of
- no future economic benefit is expected

Question 25

gain/loss =

Answer 25

proceeds on disposal minus carrying amount

Question 26

how are gains/losses on disposals treated?

Answer 26

they go in the P&L as a gain on disposal of PPE under non-operating income

Question 27

an asset costed £30,000, accumulated depreciation is £10,000, and was recently sold for £5,000

what is the gain/loss?

Answer 27

proceeds on disposal minus carrying amount

5,000 - (30,000 - 10,000) = -15,000

15,000 loss

Question 28

when does impairment occur?

Answer 28

when CA > RA

Question 29

RA?

Answer 29

recoverable amount

higher of VIU or FV less cost of disposal

Question 30

CA?

Answer 30

carrying amount

aka net book value (NBV)

cost - accumulated depreciation

Question 31

external/internal indications of impairment?

Answer 31

external = decrease in market value
internal = obsolescence/ physical damage

Question 32

if fair value less costs of disposal OR VIU exceed carrying amount, what does this mean?

Answer 32

there’s no impairment

Question 33

how is impairment loss recognised with cost model?

Answer 33

if using cost model: dr impairment loss (P&L), cr asset

Question 34

how is impairment loss recognised with revaluation model?

Answer 34

if using revaluation model: dr revaluation surplus, cr asset

if there’s no revaluation surplus, impairment for revaluation is recorded as an expense in the P&L

Question 35

what type of expense is depreciation?

Answer 35

operating expense

Question 36

how are gifted assets recognised in the SOFP?

Answer 36

initially at cost, which is 0

subsequent accounting periods, recognised at fair value